Tax-efficient gifts to charity

Increasingly, people are gifting money to a favoured charity. Is it more tax efficient to give a financial gift to charity when you are alive, or in your will? Charities rely heavily on individual financial gifts made either during the giver’s lifetime or in their will. In fact, this type of giving accounts for a significant percentage of the annual income of all the big charities.

Gifts given during life qualify for Gift Aid. This is the scheme where the government tops up your gift so charities can claim 25% of the total value of your donation from HMRC. However, if your donation is more than four times the total income and capital gains tax you pay in the relevant tax year you may have to make up the shortfall in the tax the charity claims. If you are a higher-rate or additional-rate tax payer, you can claim back an additional 20% and 25% through your tax return, which you can then also donate.

The other way to donate during life is direct from your gross pay or your pension if your employer operates a Payroll Giving scheme. The donation qualifies for tax relief, so if you pay basic rate tax, a £1 donation will cost just 80p. If you are a higher-rate payer, you will pay 60p for a £1 donation.

Legacy donations help the donor to mitigate inheritance tax. At present, there is an individual allowance of £325,000 before inheritance tax is applied to your estate. Additionally, from April 2017, a ‘residence nil rate band’ has been introduced. This applies to estates worth up to £2m that include a main home being passed to a direct descendant. This is a phased-in allowance which rises to £175,000 per person from 2020/21.An example: A charitable gift of £5,000 during life, including Gift Aid, means your charity receives £6,250. You can also claim back £1,250 through your tax return so you have paid out £3,750.

A charitable gift of £5,000 made in your will means the charity will receive £5,000, but the value of your estate falls by the same amount for inheritance tax purposes. Therefore the inheritance tax due is reduced by £2,000, so the cost to your estate is £3,000.

Above and beyond a straightforward cash gift, you can lower the inheritance tax rate on your taxable estate from 40% to 36% if you donate at least 10% of your estate to charity. You can also leave non-cash assets in your will to charity.

You should always seek professional advice to make sure you are making decisions that are most beneficial for you. Please call us on 01252 711244.

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